The Elusive Financial Guarantee Bond

Most lenders today are looking for collateral that is safer than land, which makes sense: look at the number of properties that are close to or are under bank ownership. Collateral today almost has to be cash or “cash backed”. There are all kind of instruments that qualify as excellent collateral: stand by letters of credit, Bank guarantee’s, and financial guarantees: often called “insurance wraps” Many people think that they can obtain an insurance wrap, and have the insurance wrap take care of the lender’s demand for more collateral. However, finding a real insurance wrap provider is challenging in today’s environment. I sought one out, and got a lot of information from Carlyle, just such a provider.

If you were to request a financial guarantee, you would have to provide information to support the request. After all, the guarantee provider is going to, for a fee, assume the liability should a client default. Here is what Carlyle shared regarding items that are required: “Financial guarantee bonds are generally considered to be a much higher risk than standard surety and fidelity products, therefore my due diligence must include a review of the proposed contract, the collateral that you wish to deposit to support the bond, your current audited financial statement, and the financial statements of all indemnitors in involved in your project”.

Were the insurance provider willing to move forward with issuing the guarantee, as you can imagine, there is a fee associated with that guarantee. Carlyle shared this: “premiums are generally fifteen percent (15%) on face value per annum for those bonds under five million, and ten percent (10%) on face value for those bonds in excess of five million dollars. Collateral security in the form of cash or cash equivalent (i.e., U.S. Treasury issues, notes, bills, warrants, and highly stable, publicly traded stock or bond issues) will be credited at eighty percent of current market value. Collateral in the form of real property will be credited at fifty percent of current market value. Letters of credit are acceptable at even value with the bond”

When I asked Carlyle why it was so hard to find a financial guarantee for a project, he shared a very key piece of information: “With regards to ratings, to my knowledge there are only two financial guarantee insurers in the United States. NEITHER of those entities is willing to write bonds for private contracts. They will only issued financial guarantee bonds to municipalities that collateralize the obligation with bonds or other instruments issued by that municipality as collateral”. The aforementioned statement goes a long way towards explaining why insurance wraps are so challenging to obtain.

So where would one go to find an insurance wrap? Once again, Carlyle was extremely helpful. However, there was a cautionary piece of information included with the assistance: “The Appleton Law (NY), other state statutes, and many insurance commissioner promulgated codes severely restrict financial guarantee to mono-line insurers. This posture forces carriers that wish to engage in financial guarantee business in addition to other insurance, to move to a domicile without those restrictions. Bermuda, Seychelles, the British Virgin Islands and the Dominican Republic are currently the choice destinations for offshore captives. There is no ‘automatic’ rating system for non-U.S. admitted carriers. In order to obtain an A.M.Best rating an insurer must ordinarily have a minimum of three years ‘seasoning’, during which time they are under AMB’s market surveillance. The carrier’s financial statements and books must be open to AMB. These two requirements cause problems for offshore captives. First, by entry (admission) into the U.S. market, a carrier subjects itself to U.S. taxes, precisely one of the reasons for which insurers DO NOT enter. Second, not all insurers wish to share their financial statements with a market surveillance group. So, you will have a great deal of difficulty identifying an insurer that will do these that possesses a ‘rating’.”

I am not an expert in insurance wraps, but what I have seen is explained by what Carlyle shared. There are two entities that issue financial guarantee bonds in the US, but it appears that the issuers are limited to municipalities only. As a result, people looking for the insurance are being forced off shore to obtain the insurance. The challenge is that those entities issuing off shore, for competitive and rational reason, are not able to provide the transparency most lenders want to see in order to make sure that the guarantee is sufficiently “capitalized”. After all, if you are the lender, you want to make sure that the guarantor has the ability to perform in the event a borrower with a guarantee defaults. The lack of transparency makes it very difficult to match the lender’s need for “safety and security” with the needs of the borrower looking to provide the same.

I tend to write long posts, and this post is certainly no exception. However, the hope is that the information proves useful. Carlyle also provides other bonds, and his response and professionalism were very apparent. Please contact us at Commercialfundingsolution@gmail.com if you need further information: we would be happy to introduce you to Carlyle

Funding/Monetizing/POF Opportunities:

The goal of this blog is to provide information, and assist in obtaining financing for clients and/or projects that need assistance. The intention is to provide procedures, and information that may help get your project “un-stuck”. One of our trusted funding sources recently provided this guidance regarding their capabilities, and their selection criteria. Take a look, and, if you see a fit, let us put you in touch.

In a frozen credit market such as today, companies need solutions fast. We make it very simple! We do NOT get involved in the particulars of your companies project! We strictly look at the overall scenario of your loan request and immediately start working on the solution. Many professionals have gone so far to pay up- front fees to brokers whom take their money and never perform. You may have had this very experience yourself. This is not how we operate; our time is just as valuable as yours!

Simple Overview:

There are 2 important factors in the successful outcome of your funding. Without the right mix, the money won’t flow. In many cases we can help provide the missing link required to complete your funding.

Relationships: This is purely relationship driven funding. We look to you to provide relationships and contacts necessary to provide a successful funding, in turn we will share relationships when necessary to bridge the gap.

Instruments / Collateral / Projects: Our primary US Fund lends on Direct Pay Letter of Credit (DPLC) and Letters of Credit (LC) among other instruments. Our Foreign Trust will review SBLC, leased / purchased instruments, Bonds, CDs, Munis, T-Bills, Stocks and others. We have unique funding available for “Out of the Box” assets, and additional relationship avenues for “Stand Out” project specific financing. BCF may also provide access to personal contacts that can review your current structure and provide solutions to achieving the instruments we require.

Scenarios given are for example purposes only; Examples may or may not apply to your request:

Marketable Securities:

Today’s domestic financial institutions usually require collateral in order to issue a DPLC / LC or SBLC. Collateral most commonly accepted from these institutions are marketable securities such as: Bonds, T-Bills, CDs, Muni’s, Stocks & other portfolio security examples.

Each individual institution determines what LTV you will be granted. Clients who have these types of instruments are able to keep the collateral in their own bank, if their bank has an “A” rating. Allowing clients the full ability to earn the interest on their collateral while utilizing our funds at an incredibly low rate provides a stable a secure form of arbitrage.

“Out of the Box” Assets:

Some of our banking and financial relationships will provide a DPLC / LC on certain high end “out of the box” assets

Examples are:

• Fine Art
• Rare Stringed Instruments
• Private Jets & Airplanes
• Private Yachts
• Manufacturing Plants
• Multi – Location Commercial Projects
• Owner & Non-Owner Commercial Projects
• Operational Mineral & Precious Gem Mines
• Gold & Precious Gems / Stones
• Casino & Green Projects

International Projects Available on a Case by Case basis.

Private, V.C. & Angel Investors:

Private, V.C., Angel Investors and collateral providers have found our lending sources as an additional way to earn additional safe arbitrage while continuing to lend at better returns using our money, not theirs.

By leveraging your current assets, Investors are able to wrap them in an attractive Bond, CDs or other alternatives they choose offering excellent returns. These interest earning instruments are then lodged as collateral to obtain a DPLC.

If your financial firm is of the approved rating, your funds do not have to move. Then take advantage of our US funds at rates around 1.5% or higher depending upon rate, term and amount. If they aren’t approved we will find you this relationship.

Rule of OPM:

The rule of “Other People’s Money”. The wealthy have used this philosophy since the beginning of time. Why use your money, when you can leave it in your bank and use ours at incredibly low rates. If your institution or a relationship we introduce you to can earn you a great rate of return on your existing assets, use our relationship’s funds at such a low rate to provide incredible returns. Become an private V.C. source in a market that is massively changing. Many of our high-end clients are able to make excellent returns keeping their portfolios at their existing institutions while borrowing our funds at the lowest rates available.

Commercial Wraps & Refinance:

Do you have excellent commercial properties, yet your current banks are not able to offer a refinance or additional funding potential. For the right commercial project it is possible to provide relationships interested in a wrap refinance utilizing our funds to secure a cash out debt consolidation refinance. Details available upon request. Attractive LTV’s or short payoffs required.

Example projects are Hotels, Manufacturing Plants, Medical Facilities, Malls, Office complexes, virtually any project with great debt service, high occupancy and attractive compensating factors.

Selection criteria

Our primary US Fund requires a DPLC / LC (Direct Pay Letter of Credit or Letter of Credit) from an A rated financial institution. We do have many approved institutions that can provide these instruments against a variety of marketable securities such as CD’s, T-Bills, Muni’s, Bonds, Stocks or various collateral. Simply provide us the name of your institution a description of the instrument and we move forward rather quickly.

We continue to build solid relationships with integrity driven professionals and companies that may help you obtain one of these instruments; if what you have does not qualify. We strive to bridge these relationships in hopes to serve your needs and facilitate your funding request.

Funder requires a strict NCND to be completed before discussing the details of any of our programs. Once completing our NCND and providing a description or proof of the instrument we go to work packaging your request.

US Fund Sources :

Funder has direct personal relationships with US based financial institutions containing over $100 Billion in lending power. All relationships are proven, verifiable sources able to fund your loan requests should you meet the specific requirements.

Current interest rates are starting near 1.5% variable with 1-30+ year terms possible. Funding can be completed in as soon as 21-30 days, while larger amounts could take longer. Our US Funding source is NOT project specific, and is purely relationship, instrument, collateral & bank driven.

Standard & Poor’s and Moody’s or Fitch provides ratings on a broad range of financial institutions including banks; savings institutions; securities firms; mortgage institutions; finance companies; government-sponsored enterprises; asset managers; exchange and clearing corporations; and credit unions. To work with our US Fund Source your institution or one we provide must have an “A” rating or greater to qualify.

Our US Funding Source has approved a few routes to access our funding. By providing a Direct Pay Letter of Credit (DPLC) which is similar to a Letter of Credit, we will fund 100% (less fees)

Is Your Client or Project An “A”?

In today’s lending world, there doesn’t seem to be too many “A” rated clients. Every transaction is full of challenges: too little collateral, clients without enough funds, or clients who just don’t have the ability to demonstrate that they are of the highest caliber. However, those A rated clients and projects do exist.

If you go back to your finance class, rule number one was “the bigger the risk, the bigger the reward". The “risk” for a lender is a default, and the “reward” is the interest rate that is charged to the client. In today’s world, it’s not un-common to see rates in the double digits as a result of the risk associated with the client or the project. However, if you have a client that is demonstrably an “A” rated client, the reward, based on finance number rule number one should indicate a much lower rate: some times as low as 1.5% currently.

What constitutes an “A” rated client in today’s world? The short answer is that the project and/or client’s project is secured by collateral that is “cash backed” and “callable at the counter”. In short, the loan is almost being lent for the equivalent of cash. Some of those clients that may qualify for the “A” rated designation might include: major banks, insurance companies, Fortune 1000 companies and other large firms, municipalities, and other substantial institutions.

If you have a client that is A rated, you have an opportunity to provide a rate of somewhere around 2% currently. The funding is pretty liberal as far as its usage, since it’s virtually perceived as cash: there are usually no covenants or restrictions on the use of funds as well. Some of the funding uses might include:

Project finance, working capital, start ups
Commercial Construction & Development
Corporate Acquisition, expansion, divestiture, and downsizing
Purchase & maintenance of fixtures, furniture, equipment, inventory, machinery, and physical plant
Construction & development of infrastructure and non-lethal military projects*

*This funding will not be permitted for unlawful purposes, purchase of weapons, ammunition, munitions, lethal military combat equipment, combat vehicles, or combat aircraft. Funds may also not be used for “roll programs”, high yield programs, or trading programs. Funds may also not be used for use in unlawful activities including the purported buying, selling, leasing, and/or trading of guarantees and/or fraudulent “prime bank instruments”.

There are a number of structures available for this financing, and, as mentioned above, the use of funds is very forgiving since there are no covenants associated with the funding. Should you have a client that might be considered an “A” please contact us, so we can provide them access to probably the cheapest interest rates they can find: both you and your clients will be glad you did. For information regarding the procedures, rates, and other information, contact us at: commercialfundingsolution@gmail.com or (916) 730-4200.

Does Your Submission Get Attention?

In some instances it's bad to get attention, but, when submitting your funding request you want your submission to stand out - very quickly! Lenders have no shortage of projects to review, so below is a great format to use when submitting your funding request. Since there are so many projects to review, your goal has to be to make your submission stand out very quickly. The format below is geared primarily for real estate, but it can be tailored for other funding requests as well.

Your goal in submitting your funding request is to get the reviewer's attention very quickly, and then support the submission with the appropriate documentation: Client information sheet (CIS), Executive summary, pro-forma's, and all of the other documentation necessary to submit a file that erases all of the possible concern's an underwriter may have. By submitting in this format, you've done the underwriter a favor: you've helped them know what to expect before they even review the submission.

Project Submission Format:

Subject: Funding Request: Insert Name and request info

Project Name: Pretty self explanatory

Property Location: Can be city and/or state, or more specific to begin review process

Summary:

DEAL (Simplified) – Brief Description of how the transaction is structured, and some of the pertinent details. Two or three sentences would be good.

PURCHASE/Refinance/Monetization: Detail what you are trying to accomplish

THE PROPERTY/Collateral: Brief description of the property and/or collateral for the project:

CURRENT ZONING/ENTITLEMENTS- This detailed how the current project was structured, and how this may change

TAX CREDIT- This details the fact that the tax credits (economic incentives) are included in the project. Enhances the collateral since the tax credits are able to be sold (monetized)

EXIT STRATEGY- This detailed the developers plans for how the debt was going to be retired, and the profit potential for the project.

FUTURE ENTITLEMENTS: In this instance there were future entitlements that needed to occur

FINAL LOTS- Developer was acquiring land, and was going to put lots in place that would lead to a substantial increase in value.

OWNERSHIP HISTORY- Narrative of the owner, and ownership of the project/collateral

APPRAISAL- Substantiated the value

USE OF FUNDS: How funds are to be spent, and timing of same

Attached within zip file

Executive Summary,

Source and Use of Fund

Pro-formas

Loan Request

Personal Resume

Copy of Passport

Credit Enhancement Program

In today's lending world only the best projects and best clients are able to get financing, and many projects and clients just aren't strong enough to induce a lender to risk their assets. There is a solution: a credit enhancement. In effect, the enhancement provides an additional level of collateral in order to induce the lender to make the loan. Below is a description of how the program works, and contact if you need access to this resource to help get your project funded:

The product is primarily utilized as a "credit enhancement" type product. There are two principal types of uses for the product:

1) to serve as a "balance sheet enhancement" for certain types of entities that have regulatory capital minimum requirements...in particular insurance companies, banks, and investment banks

2) to be paired with a lending institution whereby the lender accepts the Treasury derivative securities (TDS) as primary collateral for making a loan, and the TDS group takes the collateral from the company that would normally go to the lender

The minimum loan size for both transaction types is $10 million, and large transactions are preferred. Opportunities in the hundreds of millions are a good fit, they can technically go into the billions but good quality projects at that level needing these types of capabilities are rare. The minimum loan period is 12 months, they much prefer lengths of 5 years or longer. The typical cost of the TDS is around 7.5% per year, and they are not interested in revolving credit type situations where balances are drawn and paid down on a regular ongoing basis.

Life insurance companies are an ideal fit for the first transaction type as their models are very statistically predictable. As a general rule the insurance companies would get a loan of the TDS which can go on their balance sheets as "capital" vs. debt, and thus be able to write additional premiums pursuant to regulatory requirements and limitations. The TDS firm takes a pledge of controlling interest stock or other types of assets as collateral. It is much less costly than raising equity and much easier in an environment such as this, and the program works perfectly where the insurance company bank does not need cash.

With the second transaction type, the TDS must be paired with a lender. The lender takes the TDS as primary collateral, leaving the borrowing company's stock and tangible assets as collateral for the TDS. We would generally expect to lenders to lend against the TDS at a rate of 4-6% per annum, making the all in cost in most cases 12-13%, not counting our fees.

The TDS has as an underlying instrument a U.S. Treasury bond, typically of a minimum size of $3 billion. Every Treasury bond carries a unique CUSIP identifying number, and the bond is then "carved" into smaller segments which carry their own unique CUSIP number for tracking...and to ensure that there is no possibility of fraudulent duplication of the value of the underlying asset. The maturities of the underlying bonds vary, so references are always in terms of market value...not face value. As a general rule, we would expect lenders to lend to at least 90% and potentially 95% against the market value...which is a direct function of the length to maturity. There are no "interest coupons" accompanying the TDS product.

Only high quality, low risk projects will qualify as the group managing this portfolio of Treasury bonds has no interest in earning even higher yields by pursuing riskier opportunities. Examples of acceptable projects would be sound infrastructure projects, energy projects (but not "wildcat" type oil drilling and mining, etc.), high quality real estate projects (land, existing bldgs., and construction). There is particular interest in casinos (including tribal casinos in the U.S.). U.S. and foreign "stable" countries are the geographic area of interest.